October 11, 2010

Estate Tax: U.S. Tax Court Limits Estate’s Credit for Tax on Prior Transfers

Court also rules on timeliness of estate's Qualified Terminable Interest Property Trust

The U.S. Tax Court, in a Sept. 7 decision dealing with spouses who died three months apart, held that the Code Sec. 2013(b) and Code Sec. 2013(c) limitations applied to the IRS's Sec. 2013(a) credit for tax on prior transfers, and that the estate of the second spouse to die could not claim the credit for state estate tax paid by the estate of the first spouse to die, according to the Thomson Reuters “Estate Planning Alert” for October.

In addition, the alert reported, the Tax Court also held on the facts that the protective Qualified Terminable Interest Property Trust (QTIP) claim filed by the estate of the first spouse to die was untimely.

The rulings came in Estate of Lucien J. Le Caer and Estate of Marie L. Le Caer, (2010) 135 TC No. 14).

According to the alert, Code Sec. 2013(a) provides for a credit against estate tax liability of a decedent's estate where the decedent received property in a transfer from a person who died within 10 years before, or two years after, the decedent's death, and the transfer is subject to estate tax in the transferor's estate. If the transferor died within two years of the death of the decedent, the decedent's estate may claim as a credit the amount determined under Code Sec. 2013(b) and Code Sec. 2013(c).

In the case under review, the Tax Court sided with IRS in its contention that although the estate was entitled to claim a credit under Code Sec. 2013, limitations of Code Sec. 2013(b) and Code Sec. 2013(c) did apply, and that the state estate tax claimed by the estate did not qualify for the credit.

The QTIP

The second part of the ruling concerned a QTIP. The alert noted that, under Code Sec. 2056, an estate may generally deduct from the value of the gross estate the value of property passing from the decedent to his surviving spouse (marital deduction), but no marital deduction exists for terminable interest property. Code Sec. 2056(b)(7) provides for an exception to the terminable interest rule for a QTIP. Three requirements must be met for terminable interest property to qualify as a QTIP:

  • The property passes from the decedent,
  • The surviving spouse has a qualifying income interest for life in the property, and
  • The executor of the estate of the first spouse to die makes an affirmative election to designate the property as a QTIP. Upon the death of the surviving spouse, the value of his gross estate includes the value of the QTIP

The Tax Court agreed with IRS that the QTIP protective claim filed by the estate in the case under consideration was invalid.

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